South African Rand Strength Against Pound Sterling Seen Ending

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Both the short and medium term charts for the Pound / South African Rand rate are showing an increasingly positive bias.

Has ZAR's post-Brexit rally finally stalled? A study of recent price action suggests this could well be the case.

On the weekly chart the pair has just completed an a-b-c correction lower having rallied convincingly into the start of 2016.

With the pattern now complete there is scope for the pair to now rebound.

The recent recovery bounce has formed a high probability ‘Three Inside Up’ pattern, which gains credibility from following the completion of an a-b-c correction in an up-trend (as here).

Added to this is the fact that the MACD has just crossed its signal line, providing a mild bullish signal from momentum.

We see a strong chance of the pair rising up higher, with a break above the current 19.5766 highs would signal a continuation up to a target at 21.1800.

The daily chart is also looking decidedly bullish.

What we can see is that the pair has corrected up from the 17.0533 lows and has formed, what appears to be an incomplete A-B-C correction.

What is probable from here is that the pair will continue rising to complete the C wave.

The MACD is above the zero line, indicating the short-term trend is up.

Like on the weekly, a break above the 19.5766 highs will probably see an extension higher to a near-term target at 20.1200, where the R1 monthly pivot is situated.

The South African Rand has been under pressure since Friday when the usually dovish Boston Fed president Eric Rosengren said there was a risk of dithering too long before raising interest rates.

If even a dove like Rosengren was calling for a rate hike that meant that there was probably a higher chance of a near-term hike than markets had previously expected.

The rand fell on the adjustment since higher US interest rates would be expected to hurt the many SA businesses and corporations who have taken out either US originated debt or make repayments on dollar denominated debt.

"We have put on hold our constructive short-term view on the CEEMEA currencies. The synchronised sharp sell-off in global assets, as stocks and bonds fell in tandem, is a warning signal that requires a cautious approach to risky assets," says Piotr Matys at Rabobank in London.

Matys says the South African rand and the Turkish lira are traditionally the most vulnerable to escalating risk aversion.

"The trendline resistance at 14.63 is the key to watch in USD/ZAR. A break higher followed by a close above the September high at 14.7433 would indicate that a sustainable reversal could be in the making. USD/TRY is capped below the 2.98~ pivot at this stage, but the risk is skewed to the upside," says Matys.

Emerging market economies generally use more US debt or dollar denominated US debt than developed non-US countries.

The probabilities of a September hike are now in the late 20s percentage points, whilst the chance of a December hike have risen to over 60%.

The Rand stabilised Wednesday following an extended run of losses, as the US Dollar appeared to take a breather from it recent advance, just as some analysts have begun to contemplate the possibility of a recovery by the South African currency during the weeks ahead.